Johnson Outdoors - 10-Q quarterly report FY

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the quarterly period ended January 2, 2009

For the transition period from _________ to _________

Commission file number 0-16255

(Exact name of Registrant as specified in its charter)

(Address of principal executive offices)

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]   No [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer," " accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [  ] Accelerated filer [ X ] Non-accelerated filer (do not check if a smaller reporting company) [  ] Smaller reporting company [   ].

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [ X ]

 

As of January 26, 2009, 8,049,907 shares of Class A and 1,216,464 shares of Class B common stock of the Registrant were outstanding.

 

 

 

PART I      FINANCIAL INFORMATION

 

 

 

(unaudited)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

(unaudited)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

(unaudited)

 

1     Basis of Presentation

 

The condensed consolidated financial statements included herein are unaudited. In the opinion of management, these statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Johnson Outdoors Inc. and subsidiaries (the Company) as of January 2, 2009 and December 28, 2007 and the results of operations and cash flows for the three months ended January 2, 2009 and December 28, 2007. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 2008 which was filed with the Securities and Exchange Commission on January 2, 2009.

 

Because of seasonal and other factors, the results of operations for the three months ended January 2, 2009 are not necessarily indicative of the results to be expected for the Company's full 2009 fiscal year.

 

All monetary amounts, other than share and per share amounts, are stated in thousands.

 

2     Discontinued Operations

 

On December 17, 2007, the Company’s management committed to a plan to divest the Company’s Escape business and began to explore strategic alternatives for its Escape brand products. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the results of operations of the Escape business have been reported as discontinued operations in the condensed consolidated statements of operations for the three month periods ended January 2, 2009 and December 28, 2007, and in the condensed consolidated balance sheets as of January 2, 2009, October 3, 2008, and December 28, 2007. The Company recorded pre-tax and after-tax income related to the discontinued Escape business of $41 during the quarter ended January 2, 2009 compared to an after tax loss of $1,066 during the quarter ended December 28, 2007. The pre-tax and after-tax income for the quarter ended January 2, 2009 was the result of disposing of the remaining Escape business lines.  Net sales of the Escape business were $0 and $77 during the three month periods ended January 2, 2009 and December 28, 2007, respectively.  As of January 2, 2009, the Company had completed the disposal of the Escape business.

 

3     Accounts Receivable

 

Accounts receivable are stated net of an allowance for doubtful accounts. The increase in net accounts receivable to $61,613 as of January 2, 2009 from $52,710 as of October 3, 2008 is attributable to the seasonal nature of the Company's business. The determination of the allowance for doubtful accounts is based on a combination of factors. In circumstances where specific collection concerns exist, a reserve is established to value the affected account receivable at an amount the Company believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on historical experience of bad debts as a percent of accounts receivable for each business unit. Uncollectible accounts are written off against the allowance for doubtful accounts after collection efforts have been exhausted. The Company typically does not require collateral on its accounts receivable.

 

4     Earnings per Share

Net income or loss per share of Class A common stock and Class B common stock is computed in accordance with SFAS No. 128, Earnings per Share (“SFAS No. 128”), using the two-class method.

JOHNSON OUTDOORS INC.

Holders of Class A common stock are entitled to cash dividends equal to 110% of all dividends declared and paid on each share of Class B common stock. As such, and in accordance with Emerging Issues Task Force 03-06, Participating Securities and the Two-Class Method under FASB Statement No. 128 (“EITF 03-06”), the undistributed earnings for each period are allocated to each class of common stock based on the proportionate share of the amount of cash dividends that the holders of each such class are entitled to receive.

 

 

Under the provisions of SFAS No. 128 and EITF 03-06, basic net income or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding less any restricted stock.  In periods with cumulative year to date net income and undistributed income, the undistributed income for each period is allocated to each class of common stock based on the proportionate share of the amount of cash dividends that the holders of each such class are entitled to receive.  In periods where there is a cumulative year to date net loss or no undistributed income because distributions through dividends exceeds net income, Class B shares are treated as anti-dilutive and losses are allocated equally on a per share basis among the Class A and Class B shares.

 

For the three month periods ended January 2, 2009 and December 28, 2007, basic loss per share for Class A and Class B shares has been presented using the two class method in accordance with EITF 03-06 and is the same due to the cumulative net losses incurred in each period presented.

 

 

Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options and restricted stock using the treasury method. The computation of diluted net income per share of common stock assumes that Class B common stock is converted into Class A common stock.  Therefore, diluted net income per share is the same for both Class A and Class B shares.  In periods where the Company reports a net loss, the effect of anti-dilutive stock options and restricted stock is excluded and diluted loss per share is equal to basic loss per share for both classes.

 

For the three month periods ended January 2, 2009 and December 28, 2007, the effect of stock options and restricted stock is excluded from the diluted loss per share calculation as their inclusion would be anti-dilutive.

 

The Company’s current stock ownership plans provide for issuance of options to acquire shares of Class A common stock by key executives and non-employee directors. Current plans also allow for issuance of restricted stock or stock appreciation rights in lieu of options. Shares available for grant to key executives and non-employee directors were 449,549 at January 2, 2009.

 

All stock options have been granted at a price not less than fair market value at the date of grant and become exercisable over periods of one to three years from the date of grant. Stock options generally have a term of 10 years.

 

All of the Company’s stock options outstanding are fully vested, with no further compensation expense to be recorded. There were no grants of stock options during the three months ended January 2, 2009.

 

 

 

A summary of stock option activity for the three months ended January 2, 2009 related to the Company’s plans is as follows:

 

All shares of restricted stock awarded by the Company have been granted at their fair market value on the date of grant and vest either immediately or in three to five years after the grant date.  The Company granted 50,909 and 29,432 shares of restricted stock with a total value of $325 and $658 during the three month periods ended January 2, 2009 and December 28, 2007, respectively.  Amortization expense related to restricted stock was $112 and $142 during the three months ended January 2, 2009 and December 28, 2007, respectively. Unvested restricted stock issued and outstanding as of January 2, 2009 totaled 114,649 shares, having a gross unamortized value of $1,205, which will be amortized to expense through November 2013 or adjusted for changes in future estimated or actual forfeitures.  Restricted stock grantees may elect to reimburse the Company for withholding taxes due as a result of the vesting of restricted shares by tendering a portion of the vested shares back to the Company.  Shares tendered back to the Company totaled 8,071 for the three month period ended January 2, 2009.

 

A summary of unvested restricted stock activity for the three months ended January 2, 2009 related to the Company’s plans was as follows:

The Company’s employees’ stock purchase plan provides for the issuance of shares of Class A common stock at a purchase price of not less than 85% of the fair market value of such shares on the date of grant or at the end of the offering period, whichever is lower. The grant period for the employee’s stock purchase plan generally occurs during the Company’s second fiscal quarter.  Accordingly, no compensation expense was recognized during the three month periods ended January 2, 2009 or December 28, 2007 in connection with this plan.  Shares available for purchase by employees under this plan were 55,764 at January 2, 2009.

 

The components of net periodic benefit cost related to Company sponsored benefit plans for the three months ended January 2, 2009 and December 28, 2007 were as follows:

The Company’s provision for income taxes is based upon estimated annual effective tax rates in the tax jurisdictions in which the Company operates. The Company’s effective tax rate for the three months ended January 2, 2009 was 11.4%, compared to 33.2%, in the corresponding period of the prior year.  During the first quarter of fiscal 2009, the Company recorded a valuation allowance of $1,541 primarily against the net deferred tax assets in the jurisdictions of the United States, Japan, Switzerland, and the United Kingdom.  Key changes in the valuation allowance during the first quarter of fiscal 2009 resulted from the reversal of the valuation allowance for the Company’s German operations, which resulted in a benefit of $1,800 and establishing a valuation allowance for the Company’s Japanese operations which resulted in $1,200 of additional tax expense.  Items contributing to changes in the effective tax rate versus the prior year quarter include changes in the valuation allowance and mix of income from generally lower tax jurisdictions in the prior year to relatively higher tax jurisdictions in the current year.

 

Accounting Principles Board Opinion No. 28, Interim Financial Reporting, requires the Company to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate.  Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date income or loss to derive its income tax provision or benefit each quarter.  The tax impact of certain significant, unusual or infrequently occurring items must be recorded in the interim period in which they occur.  Circumstances may arise which make it difficult for the Company to determine a reasonable estimate of its annual effective tax rate for the fiscal year.  This is particularly true when small variations in the projected earnings or losses could result in a significant fluctuation in the estimated annual effective tax rate.  In accordance with FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods, the Company has determined that a reliable estimate of its annual income tax rate cannot be made due to valuation allowances, and that the impact of the Company’s operations in the United States, Japan, New Zealand, Spain, Switzerland, and the United Kingdom should be removed from the effective tax rate methodology and recorded discretely based upon year-to-date results.  The effective tax rate methodology continues to be used for the majority of the Company’s other foreign operations.

 

There have been no material changes in unrecognized tax benefits as a result of tax positions taken by the Company in the three months ended January 2, 2009.  The Company estimates that the unrecognized tax benefits will not change significantly within fiscal 2009.  In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the three months ended January 2, 2009, $8 of interest was recorded as a component of income tax expense in the condensed consolidated statement of operations. At January 2, 2009, $112 of accrued interest and penalties are included in the condensed consolidated balance sheet.

 

 

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) effective in the quarter ending December 28, 2007 with no impact on its consolidated financial statements.

The Company is currently under examination by taxing authorities in the U.S. The Company is not undergoing any tax examinations in any of its major foreign jurisdictions.  The U.S. examination may be resolved within the next twelve months, but at this time it is not possible to estimate the amount of impact of any changes to the previously recorded uncertain tax positions.  As of the adoption date of FIN 48, the tax years subject to review in Switzerland, Italy, Germany, France, Canada, and Japan were the years after 1998, 2004, 2005, 2006, 2004, and 2007, respectively.

 

Inventories at the end of the respective periods consist of the following:

 

 

Effective October 4, 2008, the Company adopted Statement of Financial Accounting Standard No. 157, Fair Value Measurements(“SFAS No. 157”).  In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date ofSFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and financial liabilities only effective as of October 4, 2008. The adoption of this statement did not have a material impact on the Company’s condensed consolidated results of operations and financial condition. See Note 18 – Fair Value Measurements for additional disclosures.  The Company does not expect application of SFAS No. 157 with respect to its non-financial assets and non-financial liabilities to have a material impact on its consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). This standard permits an entity to elect to measure many financial instruments and certain other items at fair value. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. Entities electing the fair value option would be required to report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. Entities electing the fair value option would be required to distinguish, on the face of the balance sheet, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute.  SFAS No. 159 became effective for the Company on October 4, 2008.  The Company elected not to measure any eligible items using the fair value option in accordance with SFAS No. 159 and therefore, SFAS No. 159 did not have an impact on the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations, or condensed consolidated statements of cash flows.

 

 

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”).  The objective of SFAS No. 141(R) is to improve the information provided in financial reports about a business combination and its effects. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141(R) also requires the acquirer to recognize and measure the goodwill acquired in a business combination or a gain from a bargain purchase. SFAS No. 141(R) will be applied on a prospective basis for business combinations where the acquisition date is on or after the beginning of the Company’s 2010 fiscal year.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (“SFAS No. 160”). The objective of SFAS No. 160 is to improve the financial information provided in consolidated financial statements. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also changes the way the consolidated income statement is presented, establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, and expands disclosures in the consolidated financial statements in order to clearly identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for the Company’s 2010 fiscal year. The Company does not anticipate that SFAS No. 160 will have any material impact on its consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133(“SFAS No. 161”). SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effect these instruments and activities have on an entity’s financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt SFAS No. 161 beginning in the second quarter of fiscal 2009. The Company does not believe the adoption of SFAS No. 161 will have a material impact on the Company’s consolidated financial statements.

 

On November 16, 2007, the Company acquired 100% of the common stock of Geonav S.r.l. (Geonav), a marine electronics company for approximately $5,646 (cash of $5,242 and transaction costs of $404). The acquisition was funded with existing cash and borrowings under our credit facilities. Geonav is a major European brand of chart plotters based in Viareggio, Italy. The Company believes that the purchase of Geonav will allow the Company to expand its product line and add to its marine electronics distribution channels in Europe. Also sold under the Geonav brand are marine autopilots, VHF radios and fishfinders. Geonav is included in the Company’s Marine Electronics segment.

 

 

The following table summarizes the final allocation of the purchase price, fair values of the assets acquired and liabilities assumed, and the resulting goodwill acquired at the date of the Geonav acquisition, which resulted in a decrease in goodwill of $781.

 

The acquisition was accounted for using the purchase method and, accordingly, the Company's condensed consolidated financial statements include the results of operations of the Geonav business since the date of acquisition.

 

The increases in goodwill assets during the three months ended January 2, 2009 and December 28, 2007, respectively, are as follows:

During the year ended October 3, 2008, the Company recorded an impairment of goodwill of $39,603.

The Company provides for warranties of certain products as they are sold. The following table summarizes the Company's warranty activity for the three months ended January 2, 2009 and December 28, 2007.

 

The Company uses interest rate swaps in order to maintain a mix of floating rate and fixed rate debt such that permanent working capital needs are largely funded with fixed rate debt and seasonal working capital needs are funded with floating rate debt. To manage this risk in a cost efficient manner, the Company enters into interest rate swaps in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for understanding hedge transactions. Interest rate swaps that meet specific conditions under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities  (“SFAS No. 133”), are accounted for as cash flow hedges. Under such accounting treatment, the mark-to-market values of both the cash flow hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in the interest expense component of the Company's condensed consolidated statement of operations.

 

On October 29, 2007 the Company entered into a forward starting interest rate swap (the “Swap”) with a notional amount of $60,000 receiving a floating three month LIBOR interest rate while paying at a fixed interest rate of 4.685% over the period beginning on December 14, 2007 and ending on December 14, 2012. Interest is payable quarterly, starting on March 14, 2008.  The Swap was designated as a cash flow hedge and as of October 3, 2008, was expected to be an effective hedge against the impact on interest payments of changes in the three-month LIBOR benchmark rate.   The intent of the Swap was to lock the interest rate on $60,000 of three-month floating rate LIBOR debt at 4.685%, before applying the applicable margin. The market value of the Swap will rise and fall as market expectations of future floating rate LIBOR interest rates over the five year life of the Swap change in relation to the fixed rate of 4.685%.  The Company values the Swap at period end and records the effective portion of the Swap in accumulated other comprehensive income (loss).  Any ineffective portion is recorded in earnings.

 

On December 29, 2008, the Company and JPMorgan Chase (“the Counterparty”) agreed to amend the terms of the Swap contract to include an automatic termination clause, which would cause the Swap to terminate on January 8, 2009.  The Company and the Counterparty negotiated a modification of the terms of the Swap to accommodate the new debt agreements effective January 8, 2009 thus obviating the automatic termination.  See Note 19 – Subsequent Events for a discussion of changes in the Company’s interest rate swap positions since January 2, 2009.

 

As a result of the amendment of the Company’s debt agreements which became effective as of January 2, 2009, the Company prepared an analysis of the Swap in respect of the new terms as of that date and concluded that the Swap was no longer highly effective as a hedge against the impact on interest payments of changes in the three-month LIBOR benchmark rate due to the LIBOR floor provision in the amended terms of the debt agreement.  The effective portion of the Swap prior to the modification will remain in accumulated other comprehensive income (loss) and will be amortized as interest expense over the period of the originally designated hedged transactions.  Future changes in the fair value of the interest rate swap will be immediately recognized in the consolidated statement of operations as interest expense.

 

The Swap has been recorded as a liability at its fair value of $5,937 on January 2, 2009, and as a component of accumulated other comprehensive income in shareholders equity, in accordance with SFAS No. 133.  The fair value of the Swap on October 3, 2008 was a liability of $2,759.  The loss on the Swap increased by $3,178 during the three months ended January 2, 2009.

 

Comprehensive income (loss) includes net income (loss) and changes in shareholders’ equity from non-owner sources. For the quarters ended January 2, 2009 and December 28, 2007, the difference between net loss and comprehensive income (loss) is due to cumulative foreign currency translation adjustments and the effect of recording the fair value of an interest rate swap designated as a cash flow hedge. Strengthening of worldwide currencies against the U.S. dollar created the Company's translation adjustment income for the three months ended January 2, 2009 and December 28, 2007. The impact of the cash flow hedge on comprehensive income (loss) was the result of changes in LIBOR rate futures over the remaining four year life of the interest rate swap during the three month period ended January 2, 2009.

 

 

Comprehensive income (loss) for the respective periods consisted of the following:

 

 

 

The following represents a reconciliation of the changes in restructuring reserves related to this project through January 2, 2009.

 

 

JOHNSON OUTDOORS INC.

 

In June 2008, the Company announced plans to restructure and downsize its Binghamton, New York operations due to continued significant declines in sales of military tents.  The Company expects the total cost of this restructuring to be $320, consisting entirely of employee termination costs.  Payments of $69 were made during the three months ended January 2, 2009.  Approximately $23 of payments will be made in the second quarter of fiscal 2009.  These charges are included in the “Administrative management, finance and information systems” line in the Company’s Condensed Consolidated Statements of Operations.  This action resulted in the elimination of 27 positions.

 

The following represents a reconciliation of the changes in restructuring reserves related to this project through January 2, 2009.

 

 

The Company is subject to various legal actions and proceedings in the normal course of business, including those related to product liability and environmental matters. The Company is insured against loss for certain of these matters. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management does not believe the final outcome of any pending litigation will have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.

 

On July 10, 2007, after considering the costs, risks and business distractions associated with continued litigation, the Company reached a settlement agreement with Confluence Holdings Corp. that ended a long-standing intellectual property dispute between the two companies. The Company has made a claim with its insurance carriers to recover the $4,400 settlement payment, plus defense costs (approximately $900). This matter is presently the subject of litigation in the U.S. District Court for the Eastern District of Wisconsin. The Company is unable to estimate at this time the amount of insurance recovery and, accordingly, has not recorded a receivable for this matter.

 

On February 12, 2008, the Company entered into a term loan agreement, with JPMorgan Chase Bank N.A., as lender and agent, for the other lenders named therein (“the lending group”). This term loan agreement consisted of a $60,000 term loan maturing on February 12, 2013, bearing interest at a three month LIBOR rate plus an applicable margin. The applicable margin was based on the Company’s ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization (EBITDA) and varied between 1.25% and 2.00%. On the same date, the Company entered into an amended and restated revolving credit agreement with the lending group.  This amendment updated the Company’s October 7, 2005 revolving credit facility to allow for the term loan and to amend the financial covenants in the revolving credit facility.  At October 3, 2008, the margin in effect was 2.00% for LIBOR loans.  On the same date, the Company entered into an amended and restated credit agreement, with the lending group. This amendment updated the Company’s October 7, 2005 revolving credit facility to allow for the term loan and to amend the financial covenants in the revolving credit facility.

 

 

The term loan agreement requires the Company to comply with certain financial and non-financial covenants.  Among other restrictions, the Company is restricted in its ability to pay dividends, incur additional debt and make acquisitions above certain amounts. The key financial covenants include minimum fixed charge coverage and maximum leverage ratios. The most significant changes to the previous covenants include the minimum fixed charge coverage ratio increasing from 2.00 to 2.25 and the pledge of 65% of the shares of material foreign subsidiaries.

 

As of October 3, 2008, the Company was in violation of certain of its covenants and on October 13, 2008, the Company entered into an omnibus amendment of its term loan agreement and revolving credit facility effective as of October 3, 2008 with the lending group.  On the same date, the Company also entered into a security agreement with the lending group which resulted in certain inventories and receivables being used as collateral.  The omnibus amendment temporarily modified certain provisions of the Company’s term loan agreement and revolving credit facility.

 

The omnibus amendment reset the applicable margin on the LIBOR based debt at 3.25%.  Under the terms of the omnibus amendment, certain financial and non-financial covenants were modified, including restrictions on the Company’s ability to increase the amount or frequency of dividends, a restriction in the aggregate amount of acquisitions to no more than $2,000, adjustments to the maximum leverage ratio which could not exceed 5.0 to 1.0 and adjustments to the minimum fixed charge coverage ratio which could not be less than 1.75 to 1.0 for the quarter ended October 3, 2008.  In addition, the definition of consolidated EBITDA was modified to exclude certain non-cash items. The omnibus amendment did not reset the net worth covenant and the Company was in violation with this covenant as of October 3, 2008.  

 

On December 31, 2008, the Company entered into an amended and restated term loan agreement and an amended and restated revolving credit facility agreement with the lending group, effective January 2, 2009.  Changes to the term loan include shortening the maturity date to October 7, 2010, adjusting financial covenants and adjusting interest rates.  The revised term loan bears interest at a LIBOR rate plus 5.00% with a LIBOR floor of 3.50%.  The amended and restated revolving credit facility reduced the Company’s borrowing availability from $75,000 to $35,000, with an additional reduction of $5,000 required by January 31, 2009.  The maturity date of the revolving credit facility remains unchanged at October 7, 2010 and outstanding borrowings under this facility bear interest at LIBOR plus 4.50%. The amended and restated debt agreements provide for collateral of fixed assets and intellectual properties in the United States, in addition to certain inventories and accounts receivable already pledged under the omnibus amendment.  The revolving credit facility is limited to a borrowing base calculated at 70% of accounts receivable and 55% of inventory for the months of October through January, and 50% of accounts receivable and 50% of inventory for the other months of the year, which are further reduced by other outstanding borrowings.

 

The modification of the term loan agreement on January 2, 2009 did not qualify as a significant modification under EITF 96-19.  As such, previously capitalized deferred financing costs remain capitalized and additional costs paid to the lenders of $1,196 were capitalized.  The modification of the revolving credit facility was accounted for under EITF 98-14 and resulted in a lower borrowing capacity.  Accordingly, deferred financing costs of $32 were written off during the three month period ended January 2, 2009.

 

At January 2, 2009, the Company had borrowings of $13,500 outstanding under the revolving credit facility.

 

Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard established a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 as of January 2, 2009:

The fair value of the derivatives reported above were measured using the market value approach.

On January 8, 2009, the Company entered into an agreement to modify the terms of its October 29, 2007 $60,000 forward starting interest rate swap (“Swap A”) by shortening the maturity date from December 14, 2012 to December 14, 2011.  The Company paid JPMorgan Chase (“the Counterparty”) $1,239, which was the agreed upon fair value of the net payments that would no longer be required under Swap A as a result of the shortened term.

 

In addition, on January 8, 2009, the Company entered into two new interest rate swaps in order to eliminate the potential for further losses or gains on Swap A:

 

 

 

 

 

The Company conducts its worldwide operations through separate business units, each of which represents major product lines. Operations are conducted in the United States and various foreign countries, primarily in Europe, Canada and the Pacific Basin. The Company had no single customer that represented more than 10% of its total net sales during the three month periods ended January 2, 2009 and December 28, 2007.

Net sales and operating profit include both sales to customers, as reported in the Company's condensed consolidated statements of operations, and interunit transfers, which are priced to recover cost plus an appropriate profit margin. Total assets represent assets that are used in the Company's operations in each business segment at the end of the periods presented.

 

A summary of the Company’s operations by business unit is presented below:

 

JOHNSON OUTDOORS INC.

 

Item 2        Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes comments and analysis relating to the results of operations and financial condition of Johnson Outdoors Inc. and its subsidiaries (the Company) as of and for the three months ended January 2, 2009 and December 28, 2007. All monetary amounts, other than share and per share amounts, are stated in millions.

 

Our MD&A is presented in the following sections:

 

Our MD&A should be read in conjunction with the condensed consolidated financial statements and related notes that immediately precede this section, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2008 which was filed with the Securities and Exchange Commission on January 2, 2009.

 

 

Certain matters discussed in this Form 10-Q are “forward-looking statements,” and the Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of those safe harbor provisions. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as the Company “expects,” “believes” or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include the matters described under the caption "Risk Factors" in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2008 which was filed with the Securities and Exchange Commission on January 2, 2009 and the following:  changes in consumer spending patterns; the Company’s success in implementing its strategic plan, including its focus on innovation; actions of and disputes with companies that compete with the Company; the Company’s success in managing inventory; the risk that the Company’s lenders may be unwilling to provide a waiver or amendment if the Company is in violation of its financial covenants and the cost to the Company of obtaining any waiver or amendment that the lenders would be willing to provide; the risk of future writedowns of goodwill or other intangible assets; movements in foreign currencies or interest rates; the Company’s success in restructuring its Watercraft operations; the success of suppliers and customers; the ability of the Company to deploy its capital successfully; adverse weather conditions; and other risks and uncertainties provided in the Company’s filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this filing. The Company assumes no obligation, and disclaims any obligation, to update such forward-looking statements to reflect subsequent events or circumstances.

 

 

 

 

 

We have registered the following trademarks, which may be used in this report:  Minn Kota®, Cannon®, Humminbird®, Bottom Line®, Fishin' Buddy®, Silva®, Eureka!®, Geonav®, Old Town®, Ocean Kayak™, Necky®, Escape®, Lendal®, Extrasport®, Carlisle®, Scubapro®, UWATEC® and Seemann™.

 

 

The Company is a leading global manufacturer and marketer of branded seasonal outdoor recreation products used primarily for fishing, diving, paddling and camping.  The Company’s portfolio of well-known consumer brands has attained leading market positions due to continuous innovation, marketing excellence, product performance and quality.  The Company’s management believes its brands enjoy a premium reputation among outdoor recreation enthusiasts and novices alike.  Company values and culture support entrepreneurism in all areas, promoting and leveraging best practices and synergies within and across its subsidiaries to advance the Company’s strategic vision set by executive management and approved by the Board of Directors.  The Company is controlled by Helen P. Johnson-Leipold, Chairman and Chief Executive Officer, members of her family and related entities.

 

 

Quarterly sales are typically lowest during the first quarter of the fiscal year as the Company ramps up production in preparation for the primary selling season for its outdoor recreational products.   The 8.2% decrease in net sales for the quarter ended January 2, 2009 over the same period in the prior year resulted primarily from weak economic conditions and declines in consumer spending.

 

Key changes in the quarter included:

 

 

Gross profit margins were 36.0% for the quarter ended January 2, 2009, compared to 38.6% in the prior year quarter, due primarily to lower production volumes and an unfavorable product mix at Watercraft, and currency impacts on purchased product, lower production volumes, and close out sales in Diving.

 

Operating expenses for the quarter ended January 2, 2009 were down $3.5 million from the prior year quarter driven primarily by aggressive cost savings initiatives and no incentive compensation expenses in the current year quarter versus an expense of $1.6 million in the prior year quarter, which cost reductions were partially offset by $0.4 million of costs associated with the relocation of dive computer manufacturing.

 

 

The Company’s business is seasonal in nature. Quarterly sales are typically lowest during the first quarter of the fiscal year as the Company ramps up production in preparation for the primary selling season for its outdoor recreational products. The table below sets forth a historical view of the Company’s seasonality during the last three fiscal years.

 

 

 

 

 

The Company’s net sales and operating profit (loss) by segment are summarized as follows:

See Note 20 of the notes to the condensed consolidated financial statements for the definition of segment net sales and operating profits.

 

 

 

 

 

 

 

Net sales for the Diving business were$15.6 million this quarter, versus $21.5 million in the prior year quarter, adecrease of$5.9million or 27.8%. Thedecrease was due largely to slowing economies in key international markets and unfavorable currency translation which had a negative 5% impact on revenues.

 

 

Gross profit as a percentage of net sales was 36.0% on a consolidated basis for the quarter ended January 2, 2009 compared to 38.6% in the prior year quarter. The decline in gross profit margin was primarily due to lower production volume and unfavorable product mix at Watercraft and lower margins in Diving due to currency impacts on purchased product, lower production volumes, and close out sales.

 

 

Operating expenses were $30.3 million for the quarter ended January 2, 2009, a decrease of $3.6 million over the prior year quarter amount of $33.9 million.  Primary factors were aggressive cost savings initiatives, no incentive compensation expenses in the current year quarter versus an expense of $1.6 million in the prior year quarter, and favorable foreign currency exchange translation of $0.9 million in the current year quarter.  These factors were partially offset by $0.4 million of costs associated with the relocation of dive computer manufacturing to Indonesia and incremental operating expenses from the Geonav business acquired in November 2007.

 

 

Operating loss on a consolidated basis for the three months ended January 2, 2009 was $5.2 million compared to an operating loss of $4.6 million in the prior year quarter.  The increase in the Company’s operating loss in the current period over the prior year period was primarily due to the factors impacting gross profit and operating expenses discussed above.

 

 

 

JOHNSON OUTDOORS INC.

Interest expense totaled $1.6 million for the three months ended January 2, 2009, compared to $1.1 million in the corresponding period of the prior year, which was due to increased interest rates on the Company’s outstanding debt.

 

Interest income was $0.1 million for the three months ended January 2, 2009 compared to $0.3 million for the three months ended December 28, 2007. Other expense included a $1.1 million foreign currency exchange loss for the three month period ended January 2, 2009.  Foreign currency exchange losses were $0.3 million for the three month period ended December 28, 2007.

 

 

The Company’s provision for income taxes is based upon estimated annual effective tax rates in the tax jurisdictions in which the Company operates. The Company’s effective tax rate for the three months ended January 2, 2009 was 11.4%, compared to 33.2.%, in the corresponding periods of the prior year. Significant items contributing to changes in the effective rate versus the prior year quarter include the release of the valuation allowance in Germany based on improvement in earnings, offset by the establishment of a valuation allowance in Japan and the mix of income from generally lower tax jurisdictions in the prior year to relatively higher tax jurisdictions in the current year.

 

 

On December 17, 2007, the Company committed to a plan to divest the Company’s Escape business.  In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the operations of the Escape business have been reported as discontinued operations in the consolidated financial statements for the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006.  The Company recorded after tax losses related to the discontinued Escape business of $1.1 million during the three month period ended December 28, 2007, and a slight gain in the three month period ended January 2, 2009.

 

Net loss for the three months ended January 2, 2009 was $6.9 million, or ($0.76) per diluted common class A and B share, compared to a net loss of $4.7 million, or ($0.52) per diluted common class A and B share, for the corresponding period of the prior year due to the factors discussed above.

Accounts receivable net of allowance for doubtful accounts were $61.6 million as of January 2, 2009, a decrease of $7.5 million compared to $69.1 million as of December 28, 2007. The decrease year over year was due to lower sales and the effect of foreign currency translation of $1.8 million.

 

Inventories were $87.7 million as of January 2, 2009, a decrease of $19.2 million compared to $106.9 million as of December 28, 2007. The decrease year over year was due to the effect of foreign currency translation of $1.6 million and a concerted effort by the Company to reduce working capital levels through strict controls and improved processes.

 

Accounts payable were $21.9 million compared to $27.9 million as of December 28, 2007. The decrease year over year was due to the effect of comparatively higher business activity and extended vendor payment cycles in fiscal 2008.

 

 

 

The Company's debt-to-total capitalization ratio has increased to 39% as of January 2, 2009 from 29% as of December 28, 2007. The Company’s debt balance was $73.5 million as of January 2, 2009 compared to $82.0 million as of December 28, 2007.  Shareholders’ equity decreased $83.1 million year over year, due to the effect of net losses and the change in currency translation adjustments as the weakening of foreign currencies against the U.S. dollar increased the net book value of the Company’s foreign currency denominated subsidiaries.

 

The Company’s cash flow from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, is summarized in the following table:

Cash flows used for operations totaled $20.3 million for the three months ended January 2, 2009 compared with $33.0 million used for operations during the corresponding period of the prior fiscal year.

 

Accounts receivable increased $9.5 million for the three months ended January 2, 2009, up from a $7.7 million increase in the prior fiscal year period. Inventories decreased by $1.8 million for the three months ended January 2, 2009 compared to an increase of $13.3 million in the prior year period. The year to date change in inventory year over year was due to concerted efforts to enhance controls and processes to bring down working capital levels and the effect of reduced production activity in the current year. Accounts payable and accrued liabilities decreased $2.7 million for the three months ended January 2, 2009 versus a decrease of $9.7 million for the corresponding period of the prior year. The year to date change in accounts payable year over year reflects slower inventory growth in the current fiscal year.

 

Including the amortization of deferred finance costs, depreciation and amortization charges were $2.5 million for the three month periods ended January 2, 2009 and December 28, 2007.

 

Cash used for investing activities totaled $2.0 million for the three months ended January 2, 2009 and $8.4 million for the corresponding period of the prior year. Capital expenditures totaled $2.0 million for the three months ended January 2, 2009 and $2.4 million for the corresponding period of the prior year. The Company’s recurring investments are made primarily for tooling for new products and enhancements on existing products. In fiscal 2009, the Company's capital expenditures are anticipated to be lower than prior year levels as the Company completed leasehold improvements as well as new ERP systems in its Canadian and domestic Outdoor Equipment businesses in fiscal 2008.  Any expenditures in fiscal 2009 are expected to be funded by working capital or existing credit facilities.

 

On November 16, 2007, the Company acquired 100% of the outstanding common stock of Geonav S.r.l. (Geonav), a marine electronics company located in Viareggio, Italy, for approximately $5.6 million (cash of $5.2 million and transaction costs of $0.4 million). The acquisition was funded with existing cash and borrowings under our credit facilities.

 

 

 

 

Cash flows provided by financing activities totaled $11.8 million for the three months ended January 2, 2009 and $38.9 million for the corresponding period of the prior year. The Company made principal payments on senior notes and other long-term debt of $0.2 million and $10.8 million during the three month periods ended January 2, 2009 and December 28, 2007, respectively.

 

The Company had outstanding borrowings on revolving credit facilities of $13.5 million as of January 2, 2009 versus $72.0 million as of December 28, 2007.

 

On February 12, 2008, the Company entered into a term loan agreement with JPMorgan Chase Bank N.A., as lender and agent for the other lenders named therein (the "lending group"). This term loan agreement consisted of a $60.0 million term loan maturing on February 12, 2013, bearing interest at a three month LIBOR rate plus an applicable margin. The applicable margin was based on the Company’s ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization (EBITDA) and varied between 1.25% and 2.00%. At October 3, 2008, the margin in effect was 2.00% for LIBOR loans.  Also on February 12, 2008, the Company entered into an amended and restated revolving credit agreement with the lending group.  This amendment updated the Company’s October 7, 2005 revolving credit facility to allow for the term loan and to amend the financial covenants in the revolving credit facility.

On October 13, 2008, the Company entered into an Omnibus Amendment of its term loan agreement and revolving credit facility effective as of October 3, 2008 with the lending group. On the same date, the Company also entered into a Security Agreement with the lending group. The Omnibus Amendment temporarily modified certain provisions of the Company’s term loan agreement and revolving credit facility. The Security Agreement was granted in favor of the lending group and covers certain inventory and accounts receivable.

The Omnibus Amendment reset the applicable margin on the LIBOR based debt at 3.25%. Under the terms of the Omnibus Amendment, certain financial and non-financial covenants were modified, including restrictions on the Company’s ability to increase the amount or frequency of dividends, a restriction in the aggregate amount of acquisitions to no more than $2.0 million, adjustments to the maximum leverage ratio which cannot exceed 5.0 to 1.0 and adjustments to the minimum fixed charge coverage ratio which cannot be less than 1.75 to 1.0 for the quarter ended October 3, 2008. In addition, the definition of consolidated EBITDA was modified to exclude certain non-cash items.  The Omnibus Amendment did not reset the net worth covenant and the Company was in non-compliance with this covenant as of October 3, 2008.

On December 31, 2008, the Company entered into an amended and restated term loan agreement and an amended and restated revolving credit facility agreement with the lending group, effective January 2, 2009.  Changes to the term loan include shortening the maturity date to October 7, 2010, adjusting financial covenants and adjusting interest rates.  The revised term loan bears interest at a LIBOR rate plus 5.00% with a LIBOR floor of 3.50%.  The amended and restated revolving credit facility reduced the Company’s borrowing availability from $75.0 million to $35.0 million, with an additional reduction of $5.0 million required by January 31, 2009.  The maturity date of the revolving credit facility remains unchanged at October 7, 2010 and outstanding borrowings under this facility bear interest at LIBOR plus 4.50%. The amended and restated debt agreements provide for collateral of fixed assets and intellectual properties in the United States, in addition to certain inventories and accounts receivable already pledged under the Omnibus Amendment.  The revolving credit facility is limited to a borrowing base calculated at 70% of accounts receivable and 55% of inventory for the months of October through January, and 50% of accounts receivable and 50% of inventory for the other months of the year, which are further reduced by other outstanding borrowings.

On October 29, 2007 the Company entered into a forward starting interest rate swap (the “Swap”) with a notional amount of $60.0 million receiving a floating three month LIBOR interest rate while paying at a fixed interest rate of 4.685% over the period beginning on December 14, 2007 and ending on December 14, 2012. Interest is payable quarterly, starting on March 14, 2008.  The Swap was designated as a cash flow hedge and as of October 3, 2008, was expected to be an effective hedge against the impact on interest payments of changes in the three-month LIBOR benchmark rate.   The intent of the Swap was to lock the interest rate on $60.0 million of three-month floating rate LIBOR debt at 4.685%, before applying the applicable margin. The market value of the Swap will rise and fall as market expectations of future floating rate LIBOR interest rates over the five year life of the Swap change in relation to the fixed rate of 4.685%.  

 

 

On December 29, 2008, the Company and JPMorgan Chase (“the Counterparty”) agreed to amend the terms of the Swap contract to include an automatic termination clause which would cause the Swap to terminate on January 8, 2009.  The Company and the Counterparty negotiated a modification of the terms of the Swap to accommodate the new debt agreements effective January 8, 2009 thus obviating the automatic termination.  See Note 19 – Subsequent Events for a discussion of changes in the Company’s interest rate swap positions since January 2, 2009.

As a result of the amendment of the Company’s debt agreements which became effective as of January 2, 2009, the Company prepared an analysis of the Swap in respect of the new terms as of that date and concluded that the Swap was no longer highly effective as a hedge against the impact on interest payments of changes in the three-month LIBOR benchmark rate due to the LIBOR floor provision in the amended terms of the debt agreement.  The effective portion of the Swap prior to the modification will remain in accumulated other comprehensive income (loss) and will be amortized as interest expense over the period of the originally designated hedged transactions.  Future changes in the fair value of the interest rate swap will be immediately recognized in the income statement as interest expense.

The Swap has been recorded as a liability at its fair value of $5.9 million on January 2, 2009, and as a component of accumulated other comprehensive income, in accordance with SFAS No. 133.

See Note 19 – Subsequent Events for a discussion of changes in the Company’s interest rate swap positions since January 2, 2009.

 

Obligations and Off Balance Sheet Arrangements

The Company has obligations and commitments to make future payments under debt agreements and operating leases. The following schedule details these obligations at January 2, 2009.

Interest obligations on short-term debt are included in the category "contractually obligated interest payments" noted above only to the extent accrued as of January 2, 2009. Future interest costs on the revolving credit facility cannot be estimated due to the variability of the amount of borrowings and the interest rates on that facility. Estimated future interest payments on the $60.0 million floating rate LIBOR term debt were calculated under the terms of the amended and restated debt agreement.  As LIBOR is presently below 3.50%, the estimated future interest payments were calculated using the 3.50% rate plus the applicable margin of 5.00%.  Actual LIBOR market rates may differ significantly from this estimate.

 

The Company also utilizes letters of credit for trade financing purposes. Letters of credit outstanding at January 2, 2009 totaled $2.4 million.

 

The Company has no off-balance sheet arrangements.

 

 

 

 

The Company is exposed to market risk stemming from changes in foreign exchange rates, interest rates and, to a lesser extent, commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. The Company may reduce exposure to certain of these market risks by entering into hedging transactions authorized under Company policies that place controls on these activities. Hedging transactions involve the use of a variety of derivative financial instruments. Derivatives are used only where there is an underlying exposure, not for trading or speculative purposes.

 

 

The Company has significant foreign operations, for which the functional currencies are denominated primarily in euros, Swiss francs, Japanese yen and Canadian dollars. As the values of the currencies of the foreign countries in which the Company has operations increase or decrease relative to the U.S. dollar, the sales, expenses, profits, losses, assets and liabilities of the Company’s foreign operations, as reported in the Company’s consolidated financial statements, increase or decrease, accordingly. Approximately 25% of the Company’s revenues for the three months ended January 2, 2009 were denominated in currencies other than the U.S. dollar. Approximately 13% were denominated in euros, with the remaining 12% denominated in various other foreign currencies.

 

In the past, the Company has mitigated a portion of the fluctuations in certain foreign currencies through the purchase of foreign currency swaps, forward contracts and options to hedge known commitments, primarily for purchases of inventory and other assets denominated in foreign currencies; however, no such transactions were entered into during fiscal 2008 or the first three months of fiscal 2009.

 

The Company uses interest rate swaps, caps or collars in order to maintain a mix of floating rate and fixed rate debt such that permanent working capital needs are largely funded with fixed rate debt and seasonal working capital needs are funded with floating rate debt. The Company’s primary exposure is to U.S. interest rates.  On October 29, 2007 the Company entered into a forward starting interest rate swap (the “Swap”) having a notional amount of $60.0 million, receiving a floating three month LIBOR interest rate while paying at a fixed rate of 4.685% over an accruing period beginning December 14, 2007 and ending December 14, 2012 with interest payable quarterly. The Swap was designated as a cash flow hedge of a forecasted floating rate debt issuance of approximately $60.0 million and as of December 28, 2007, was considered an effective hedge of the impact on interest payments due to changes in the three-month LIBOR benchmark rate.

As a result of the amendment of the Company’s debt agreements which became effective as of January 2, 2009, the Company prepared an analysis of the Swap in respect of the new terms as of that date and concluded that the Swap is no longer highly effective as a hedge against the impact on interest payments of changes in the three-month LIBOR benchmark rate due to the LIBOR floor provision in the amended terms of the debt.  As a result, future changes in the fair value of the interest rate swap will be immediately recognized in the statement of operations as interest expense.

 

 

 

 

On December 29, 2008, the Company and JPMorgan Chase (“the Counterparty”) agreed to amend the terms of its $60.0 million LIBOR interest rate swap (“the Swap”) contract to include an automatic termination clause.  The Company and the Counterparty negotiated a modification of the terms of the Swap to accommodate the new debt agreements.  The modified Swap contract was entered into on January 8, 2009.

See Note 19 – Subsequent Events for a discussion of changes in the Company’s interest rate swap positions since January 2, 2009.

 

Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancelable supply contracts. Primary commodity price exposures are resin, metals, and packaging materials.

 

The estimates that follow are intended to measure the maximum potential fair value and earnings the Company could lose in one year from adverse changes in market interest rates. The calculations are not intended to represent actual losses in fair value or earnings that the Company expects to incur. The estimates do not consider favorable changes in market rates. The table below presents the estimated maximum potential loss in fair value and annual earnings before income taxes from a 100 basis point movement in interest rates on the term note outstanding at January 2, 2009:

 

The Company had $60.0 million outstanding in the amended LIBOR based term loan, maturing on October 7, 2010, with interest payable quarterly. The amended term loan bears interest at LIBOR rate plus 5.00% with a LIBOR floor of 3.50%.

 

 

The Company’s critical accounting policies are identified in the Company’s Annual Report on Form 10-K for the fiscal year ending October 3, 2008 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Policies and Estimates.” There were no significant changes to the Company’s critical accounting policies during the three months ended January 2, 2009.

 

Effective October 4, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 Fair Value Measurements (“SFAS No. 157”). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. The adoption of this statement did not have a material impact on the Company’s condensed consolidated results of operations and financial condition. See Note 18 – Fair Value Measurements for additional disclosures.  The Company does not expect application of SFAS No. 157 with respect to its non-financial assets and non-financial liabilities to have a material impact on its consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). This standard permits an entity to elect to measure many financial instruments and certain other items at fair value. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. Entities electing the fair value option would be required to report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. Entities electing the fair value option would be required to distinguish, on the face of the balance sheet, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute.  SFAS No. 159 became effective for the Company on October 4, 2008.  The Company elected not to measure any eligible items using the fair value option in accordance with SFAS No. 159 and therefore, SFAS No. 159 did not have an impact on the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations, or condensed consolidated statements of cash flows.

 

 

 

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations(“SFAS No. 141(R)”). The objective of SFAS No. 141(R) is to improve the information provided in financial reports about a business combination and its effects. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141(R) also requires the acquirer to recognize and measure the goodwill acquired in a business combination or a gain from a bargain purchase and how to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will be applied on a prospective basis for business combinations where the acquisition date is on or after the beginning of the Company’s 2010 fiscal year.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (“SFAS No. 160”). The objective of SFAS No. 160 is to improve the financial information provided in consolidated financial statements. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also changes the way the consolidated income statement is presented, establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, and expands disclosures in the consolidated financial statements in order to clearly identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for the Company’s 2010 fiscal year. The Company does not anticipate that SFAS No. 160 will have any impact on its consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133(“SFAS No. 161”).  SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effect these instruments and activities have on an entity’s financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt SFAS No. 161 beginning in the second quarter of fiscal 2009. The Company does not believe the adoption of SFAS No. 161 will have a material impact on the Company’s consolidated financial statements.

 

 

Information with respect to this item is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Market Risk Management.”

 

 

 

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(3) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the specified time periods specified in the Security and Exchange Commission’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective at reaching a level of reasonable assurance. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

See Exhibit Index to this Form 10-Q report.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

JOHNSON OUTDOORS INC.

Signatures Dated February 9, 2009

/s/  Helen P. Johnson-Leipold                                                

       Helen P. Johnson-Leipold

      Chairman and Chief Executive Officer

 

/s/  David W. Johnson                                                            

      (Principal Financial and Accounting Officer)

31